Maybe you have a great idea for a business, and you feel ready to take on the role of entrepreneur. It can be an exciting time, but you probably have a long road ahead.
A good idea is just the beginning. You need to refine that idea and develop it into a complete business plan.
Funding will be among the most critical components of your business plan. Some business ideas die before they are ever brought to life due to a lack of funding.
How can you fund your new small business? It all depends on your circumstances. Read on to check out some of the most common options for funding a new business.
Fund it Yourself
Self-funding is risky, but it is also the most straightforward method for funding your business. If you have the capital, you can bypass the hassle that comes with raising money from outside sources. You won’t have to seek approval from lenders or give anyone else a say in the operations. It is all your money, and it is all on you.
How do you fund a business yourself? If you have cash savings, that would be the simplest way. Some entrepreneurs sell possessions or tap their retirement accounts to obtain funding. Others might leverage their credit cards or refinance their mortgage. You just need to be careful. If you go too far to self-fund your business and things don’t work out, you could devastate your personal finances.
Many entrepreneurs look to loans for small businesses to get things off the ground. If you can obtain a traditional small business loan, it can be a good way to fund the start of your business without putting too much pressure on your personal finances. However, qualifying for a loan might be an issue for many. Banks are often reluctant to lend to small businesses until they have an established financial history. However, if you have good credit and strong personal finances, you might be able to obtain a loan for your new small business.
Borrow From Family and Friends
If you can’t get a conventional bank loan, you might be able to borrow from family and friends. If you have family and friends with the money to lend, it can be a simpler option than getting a loan from a bank. The funding might be limited, but it could help get a small business started.
With that said, you should try to handle the loan as if it is a business transaction and not a personal loan. Create a pitch to explain your idea to the people you plan to approach for financing. Show them how you plan to make money and explain how (and when) you plan to pay them back.
You have the business plan and the skills to execute it, but you don’t have the money. What do you do? Equity financing could be an option for this situation. With this type of funding, you are selling a stake in the company in exchange for the capital you need. The disadvantage is that you lose some control, but you get funding you do not need to pay back.
Equity financing can be raised in a number of ways. Private equity firms and venture capitalists are common sources of equity financing. Angel investors can be a great option if you can find one and get them interested in your idea.
Crowdfunding is an option that has become popular over the last few years. With crowdfunding, you obtain small amounts of money from many people. In some cases, the funding comes in the form of donations. The borrower might market their business idea as a way to raise capital. They might also offer rewards for different levels of donations. There are also models that use crowdfunding as a way to raise debt financing.
Some small businesses might be eligible for business grants. A grant is money a business might receive in order to start the company or to further a business goal. It is free money that you do not have to pay back. Grants can come from the government, non-profit organizations or other businesses. Usually, the grant is a part of a program to help specific groups or further various social goals. The trouble with grants is that they usually have strict eligibility requirements.
Funding a business can be a complicated matter. There is also no one-size-fits-all answer. Different entrepreneurs will have different needs and different resources available. You need to develop your business plan, review your needs and consider the types of funding to which you have access. You also need to consider the implications that can come with different types of funding. Making the wrong decisions about financing can do a lot to set your business back.